ATO Interpretative Decision

ATO ID 2004/689

Income Tax

• This ATO ID has been amended to update legislative references.
  This document has changed over time. View its history.

Issue

Can the taxpayer continue to claim a deduction for the water facility they constructed, under section 40-515 of the Income Tax Assessment Act 1997 (ITAA 1997), after they have sold the facility?

Decision

Yes. A deduction is available under section 40-515 of the ITAA 1997 to the taxpayer even after the water facility has been sold, provided that the facility is still wholly being used for a taxable purpose, or in carrying on a primary production business.

Facts

The taxpayer owned a farm in Australia and had incurred capital expenditure on the construction of a water facility as defined in subsection 40-520(1) of ITAA 1997 for the purpose of conserving water for use in the primary production business undertaken by the taxpayer on that farm. The taxpayer met the requirements for entitlement to a deduction under subsection 40-515 of the ITAA 1997 in the year of incurring the expenditure to construct the water facility.

The farm, including the water facilities, was sold as a going concern in the income year subsequent to that in which the water facility expenditure was incurred. After the farm was sold, a primary production business continued to be carried on using the water facility.

Reasons for Decision

Paragraph 40-515(1)(a) of the ITAA 1997 provides that you can deduct an amount equal to the decline in value for an income year of a water facility. A deduction for the decline in value of a water facility is allowed in equal instalments over three income years (section 40-540 of the ITAA 1997).

In order to obtain the deduction under paragraph 40-515(1)(a) of the ITAA 1997, the taxpayer must incur capital expenditure on construction, manufacture, installation or acquisition of the water facility, and the expenditure must have been incurred primarily and principally for the purpose of conserving or conveying water for use in a primary production business on land in Australia (paragraph 40-525(1)(a) of the ITAA 1997).

Subsection 40-555(1) of the ITAA 1997 provides that no deduction is available for capital expenditure on the acquisition of a water facility if any person has deducted or can deduct an amount under Subdivision 40-F of the ITAA 1997 for any income year for earlier capital expenditure on the construction, manufacture or previous acquisition of that water facility.

Subsection 40-515(4) of the ITAA 1997 requires a deduction to be reduced for an income year if a water facility was not wholly used in (a) carrying on a primary production business on land in Australia or (b) for a taxable purpose. The subsection does not specify a particular taxpayer.

As the requirements of section 40-515 of the ITAA 1997 were met for the taxpayer in the year that the expenditure was incurred, and the reduction in subsection 40-515(4) does not apply, a deduction is allowed under section 40-515 for the taxpayer in the year of incurring expenditure, for the decline in value of the water facility, as worked out under section 40-540 of the ITAA 1997.

For each of the following two years, as the facility was wholly used in carrying on a primary production business, a deduction is allowed under section 40-515 of the ITAA 1997.

Year of income:  Year ended 30 June 2002 Year ended 30 June 2003 Year ended 30 June 2004

Legislative References:
Income Tax Assessment Act 1997
   section 40-515
   paragraph 40-515(1)(a)
   subsection 40-515(4)
   subsection 40-520(1)
   paragraph 40-525(1)(a)
   section 40-540
   subsection 40-555(1)

Related Public Rulings (including Determinations)
Taxation Determination TD 96/41

Keywords
Capital expenditure
Decline in value
Primary production
Taxable purpose
Water conservation and conveying expenses

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  20 August 2004

ISSN: 1445-2782